A pricing model for group buying based on network effects.

Guanqun Ni,Yongli Li

doi:10.1371/journal.pone.0211109

Abstract

Group buying (GB) is a popular business model in e-commerce. With the rise of online social media, the positive network effect of buying with others is more important than price discount for consumers to choose GB. However, the negative network effect of GB is also significant for some consumers. In this paper, we classify consumers into two segments considering both positive and negative network effects, and three possible sales strategies as well as their optimal decisions on price are presented. We find that GB strategy dominates individual buying (IB) strategy when the positive network effect is sufficiently high or the proportion of consumers with low valuation is relatively large. We also find that MIX strategy offering both IB and GB is always better than IB, while the relationship between MIX and GB is depending on actual market situations. Some other managerial insights are also discussed.

Highlights

Group buying (GB) is a form of selling under which consumers are encouraged to buy together and discounts are offered based on consumers’ aggregated purchasing quantity [1]
We find that offering both options simultaneously can improve the seller’s revenue compared to offering only individual buying (IB) option
Following Borges et al [14], we argue that αH βH and αL βL, which means that consumers in H segment are more sensitive to the negative network effect while consumers in L segment are more sensitive to the positive network effect

Summary

Introduction

Group buying (GB) is a form of selling under which consumers are encouraged to buy together and discounts are offered based on consumers’ aggregated purchasing quantity [1]. Kumar and Rajan [15] argue that social coupons are not always bringing positive network effects to consumers, when consumers are seeking a one-time deal It is sometimes inconvenient and/or unenjoyable when buying with others in GB, and we call this kind of impact of other buyers’ presence “negative network effect”. In this paper, we find that consumer utility can be enhanced by the positive network effect in GB, offering a GB option can lead to lower revenues in some cases.

The model

Optimal pricing strategies

Sensitivity analyses under IB

Comparative analyses between IB and GB

Conclusions